Posts Tagged ‘LGPS’

David Davison

In an earlier bulletin, I looked at why the current basis of cessation for admitted bodies in LGPS was causing problems and how the inconsistency of approaches taken by Funds meant that organisations struggled to understand their obligations and what steps were open to them to address the issues they face.  You can read the bulletin entitled ‘An alternative approach to cessation’ here.

In some work undertaken over the last few months I’ve identified that some Funding Strategy Statements (‘FSS’) revised over the last couple of years seem to suggest that some Funds are taking tentative steps to try to address the situation. Read more »

David Davison

I’m often asked to explain why contractors have finished up with a substantial bill payable to an LGPS at the end of an out-sourced contract. I’ve therefore compiled this very simplistic worked example to highlight the issues contractors face. The figures are for representative purposes only and are not intended to be either detailed or LGPS liability specific. Read more »

David Davison

We are delighted at Spence to be able to support a further two publications launched over the last week.

  • The 4th Edition of Charity Finance Group (‘CFG’) “Navigating the Charity Pensions Maze” was published in London on Thursday 23rd March. Spence were pleased to sponsor this invaluable publication and our Director and Head of our Charities Practice, David Davison, provided technical input on the Guide content. The Guide contains an excellent section on “Navigating the Local Government Scheme” compiled by leading legal firm Charles Russell Speechlys. This covers the benefits and risks of membership and provides a list of helpful questions charities should be asking about their participation. The CFG accompanying blog can be found here.
  • Leading representative body the Pension & Long Term Savings Association (‘PLSA’), formerly the NAPF, have launched the third of their guides covering Best Practice for Employers in LGPS with David Davison again providing technical input on the content. This was launched on the 28th March and a link to the launch information can be found here.

We believe these documents, and those published previously, will provide an excellent resource for charity trustees and senior personnel to assist them in dealing with the issues associated with LGPS membership.

David Davison

An Amicable Divorce

The question I’m asked about most often is about the cost of exiting a LGPS, as for most charities the costs can come as a bit of a surprise. One organisation I worked with recently had a small surplus at their last actuarial review and in their accounts, but when a couple of their staff left unexpectedly they were immediately hit with a bill from the fund in excess of £500,000, pretty much wiping out all their assets and placing them on the brink of insolvency. So what do you need to know?

Should you run out of active members in your LGPS fund (and not be in a position to add any new ones, for example if you have a closed agreement or a local authority contract has come to an end) under the LGPS Regulations the fund must commission the Fund Actuary to complete a cessation valuation. Whilst the Regulations do not prescribe how this calculation should be carried out, the actuaries undertaking the calculation will use very prudent ‘least risk’ assumptions based on gilt yields. This will result in liabilities being much higher than is the case on either a funding or accounting measure. Often this is the first point that an admitted body may be aware of this liability, as unfortunately numerous funds still do not provide organisations with an annual estimate of the potential cessation debt.

The conservative approach taken reflects that once an organisation exits an LGPS, the fund cannot pursue them for any extra money if the cost of providing members’ benefits is higher than expected. The fund therefore wants to make sure that there is a minimal risk that other employers in the fund would be responsible for paying for any of these exiting liabilities. As such the approach is a protection for all. However, what has been called in to question more recently is whether the basis adopted is reasonable, and indeed suitable in all circumstances. What is clear however, is that there is a great reluctance on the part of the funds to change, not surprisingly.

Whilst the approach to calculating a cessation debt across Funds, and across the various fund actuaries, tends to be consistent, the circumstances in which it applies can vary significantly. For example, some funds offer public sector out-sourcers ‘pass through’ protection, which means that any cessation debt is calculated on the much lower on-going funding basis. Other funds recognise where the last employer has inherited significant liabilities from a public sector body, and will account for these by ensuring that the public sector body picks up their fair share. Unfortunately, though the vast majority of funds do not.

Some funds are prepared to negotiate around the cessation amount payable, subject to affordability and the term of any repayment. However, in most circumstances these negotiations need to be conducted in advance of any formal debt trigger / calculation.

Admitted bodies therefore need to be aware of their situation and look to plan for it, as far in advance as possible, as allowing a cessation event to just happen could have catastrophic implications for the charity.

In my next bulletin I’ll consider why change should be considered.

David Davison

Many charities participating in local government pension schemes (‘LGPS’) have been increasingly frustrated by the lack of recognition of the issues they face by the schemes they participate in and, indeed, from Department of Communities and Local Government (‘DCLG’) who oversee them. The issues are not new but there remains an element of denial and finger pointing, and it’s very easy to see how charities could be understandably frustrated.

I often experience a feeling amongst charitable admitted bodies that Councils and LGPS encouraged them to join Funds, without ensuring independent advice was sought or providing any risk warnings about the step they were taking, and have now just abandoned them to their fate. Whilst, to a great extent, the problem has been capped over recent years as admission to Funds has become much more rigorous, this unfortunately does nothing for all those employers admitted before that stable door was closed.

For those employers, LGPS have sat on their hands allowing organisations to continue to accrue liabilities even when they clearly couldn’t afford to do so, and without providing the flexibility to address the issue. Many charities I’m aware of have approached LGPS over many years looking to stop accrual, and arrange a payment plan and were just provided with pay up or keep participating as options. Now, as funding positions have deteriorated and funding costs have increased these same schemes are pointing fingers at these same trapped charities for their inability to be able to continue to participate.

For many charities there is also a growing recognition that Councils have adeptly transferred historic past service liabilities in £millions to them, due to LGPS inability to segregate service between employers and without making employers aware of the impact. This has been hugely expensive for charities and DCLG and LGPS continue to try to ignore this issue and sweep it under the carpet. Indeed, LGPS continue to do this with unsuspecting Academies being a prime example.

A limited number of Funds and Local Authorities have sought to deal with the issues however, the response has been at best patchy and has lacked any level of standardised practice. Indeed these ore enlightened approaches attract a “nothing to do with me” response when raised with pension managers from Funds not employing them and for many admitted bodies they are completely unaware of the alternative options explored and implemented elsewhere. A lack of consistency of approach also means that each exercise needs to be looked at on an individual basis, adding complexity and professional adviser costs when helping charities through the maze.

The Shadow Scheme Advisory Board (SSAB), which was established to encourage best practice, increase transparency and coordinate technical and standards issues for LGPS as well as providing recommendations to Government for future regulation commissioned a report from PWC as part of its deficit management project kicked off in summer 2014.

The report was published in July 2015 and the key recommendations which will be of specific interest for admitted bodies are:

  • More flexibility on when exit debts are triggered. The proposals suggest that debts would not be automatically triggered by the exit of the last member. The paper recognises that some minor changes to regulation will be required.
  • Establishing a maximum level of prudence when calculating exit payments. Currently Schemes tend to use a gilts basis to calculate the exit cost despite schemes not investing assets in this way. This effectively means that employers paying a cessation debt are cross funding other employers who remain. This is recognised as inequitable and is also a discouraging factor for charities wishing to look at an exit. This proposal would effectively reduce cessation debts for those looking to exit the Scheme, for many to a point which may be affordable.
  • Flexible exit arrangements. These could include continuing to pay contributions on an on-going basis for a prescribed period and for employers to pay their cessation debts over a much longer period. This would be extremely welcome flexibility for many small employers and is a more consistent approach with that adopted in the private sector.
  • Employer exit on weaker terms. It is recognised that, in some circumstances, it could be in the interests of the Fund, the remaining employers and the admitted body to allow them to exit on weaker terms and small charities are cited specifically as an example.

These items certainly reflect much of the commentary supplied by charity representative bodies, charity advisers and charities themselves although at this stage they haven’t fully addressed issues around the transition of prior local government liabilities to charities but it is hugely helpful to charities’ positions and it has been a welcome addition to the debate, especially given that it comes from such a reputable source.

Unfortunately however, it has disappeared in to something of a black hole, possibly overtaken by other more pressing global events. The proposals however need to be addressed by the SSAB and implemented by Government and LGPS as quickly as possible. The issues faced have been created by local government, LGPS and the admitted bodies and there needs to be a commitment to co-operatively finding solutions, and a desire to do it soon. Charities need to be vocal with their Funds and local authorities about the issues they face and get them to look to address them positively. Charities should also be working collectively and in conjunction with their representative bodies to make sure their voices are heard.

David Davison

Playing the waiting game

In our fast paced society no one really likes waiting for anything, however for those financial directors of charities participating in local government pension schemes in England & Wales I’m sure they wouldn’t mind waiting a bit longer for their valuation results given everything else going on around them.

Read more »

David Davison

Taking the Strain

When faced with cost constraints, considering a reduction in staff is an obvious early consideration. However, for those employers with staff in LGPS great care needs to be taken as ‘strain costs’ imposed by the Fund could result in very significant payments, often well in excess of any salary savings made. So what do you need to look out for? Read more »

David Davison

As a participant in LGPS you will have been contracted out of the state second tier pension scheme. This means that you as an employer and those members participating will be paying lower rate national insurance contributions.

However, you’ll probably have noticed that you’re not doing this any more!! This is because contracting-out of the second state pension was abolished from 6 April 2016, to coincide with the introduction of the new single tier state pension. This will have increased the national insurance contributions (NIC) required from employers currently in LGPS, as well increasing the contributions required from employees. Employers will see an increase in contributions of 3.4% of band earnings (earnings between £5,824 and £43,004 for the 2016/17 tax year) on their pensionable payroll and employees an increase of 1.4% of band earnings.

Clearly organisations need to budget for these increased costs and make sure staff are aware of the changes, especially as given the low level of salary increases in the sector at the moment, staff may actually notice a reduction in their salary. In LGPS you have no option other than just to pay the increased costs and maintain the level of benefits provided.

Organisations in these schemes may also see some additional correspondence from their provider, and possibly some linked additional work, as they seek to reconcile their GMP information and communicate with members on the impact of the changes.

David Davison

It’s often difficult for charities to access up to date technical information. Local Government Pension Schemes provide a myriad of information but it tends not to be focussed on charities. Over the last couple of week there have been some really helpful information published which could be of benefit to charities struggling with the management of their LGPS Pension:-

  • In conjunction with Charity Finance Group (‘CFG’) leading legal firm Charles Russell Speechlys has produced an LGPS Charity briefing. The guide outlines the risks and options for charities considering joining LGPS, and the problems faced by those considering exiting. The CFG accompanying blog can be found here.
  • Leading representative body Pension & Long term Savings Association (‘PLSA’), formerly the NAPF, have launched the first two guides in a series covering charities in LGPS. These cover:

More guides are on the way from PLSA over the next few months to assist LGPS participants with managing their continued participation in LGPS, and also options for those considering an exit. CFG are also re-launching their ‘Charity Pensions Maze’ publication which contains a wealth of helpful information. More information to follow on these when available.

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